Yesterday, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google division held the keynote to its annual developer conference, Google I/O 2019. While there was plenty to talk about, including a newfound dedication to privacy, Android Q, a “next generation” Android Assistant and big moves on the Google Nest front, what’s making headlines this morning is the new Google Pixel 3a smartphone. If you’re a consumer, there’s a lot to like about Google’s affordable new phone.
But is the Pixel 3a the right move for Google and GOOGL stock? Will it do what three generations of flagship Pixel phones have failed to do and jumpstart sales?
Google Announces the Affordable Pixel 3a
At its Google I/O 2019 keynote event, Google announced a new, affordable smartphone: the Pixel 3a (and Pixel 3a XL).
Where the Pixel 3 and Pixel 3 XL start at $799 and $899, respectively, the Pixel 3a is $399, while the 3a XL starts at $479.
The big news is that the new affordable Pixel smartphones include the same camera that Google has been winning accolades for. The processor may be a bit slower (a Snapdragon 670 instead of a Snapdragon 845), but it’s still a solid performer, and the display is an OLED panel. Other then the CPU, the primary cost-cutting measures on Google’s part have been to use polycarbonate instead of glass for the back panel and to leave out water resistance and wireless charging. There’s also no second front camera for wide angle selfies.
Those who aren’t big on current design trends may even prefer the Pixel 3a, which lacks a screen notch and brings back the headphone jack.
Why go affordable? Despite having what has been arguably the best camera in the business (Huawei’s latest can top it but it is not available in the U.S.), after three generations, the Google Pixel smartphone has failed to win a meaningful marketshare.
In 2017, the company reportedly sold 3.9 million units — less than the number of iPhones rival Apple (NASDAQ:AAPL) was moving in a single week. And while Pixel sales had been showing signs of improvement — at least in the U.S. market — that has not been the case in 2019. During Alphabet’s earnings call, declining Pixel sales were addressed directly by the company’s CFO:
“Hardware results reflect lower year-on-year sales of Pixel, reflecting in part heavy promotional activity industrywide, given some of the recent pressures in the premium smartphone market.”
Going lower priced has worked for Apple. Its iPhone XR has reportedly been outselling both the iPhone Xs and iPhone XS Max combined.
Even More Affordable (For a Limited Time)
At $399, the Pixel 3a is a deal, but Google is sweetening the pot even further for a limited time. The company is offering 24 months of zero interest financing, that means consumers can pick up the new smartphone for under $17 monthly. It’s also throwing in three free months of YouTube Music Premium. Trade in an old iPhone and Google knocks the price down to as low as $149.
And until May 18, the company is offering a $100 credit with purchase to spend at the Google Store.
The Risk(s) of Cannibalization
Smartphone makers have always worried about cannibalizing their own sales if they release cheaper alternatives to their flagships. Google is unique in that the Pixel 3a could actually do this in several ways.
First, the obvious. By equipping the Pixel 3a with the stellar camera of the Pixel 3, then charging half the price, Google is risking cutting into sales of its flagship smartphones. Many consumers buy a smartphone for its camera, and now those who were circling a Pixel 3 have the option of saving themselves $400. But the Pixel phones, in general, were also meant to be Android showcases, smartphones that would tempt users away from Apple’s iPhone. However, in reality, research has shown that most Pixel buyers who are converting from another brand are former Samsung owners. There’s a risk the $399 Pixel 3a may only accelerate that trend of winning sales form existing Android manufacturers.
The upside for GOOGL stock is the likelihood for increased hardware unit sales. The potential downsides are a lower ASP and the possibility of less revenue even if overall smartphone unit sales are up — plus the risk of little net change in Android adoption marketshare.
Throwing Down the Gauntlet to Apple
With its latest smartphone, Google has signaled that it is serious about winning market share. The Pixel 3 hasn’t been able to do that, despite an award-winning camera. But the Pixel 3a’s affordable starting price sends a clear message, especially to Apple, whose “affordable” model iPhone XR is priced $350 higher. Google is ready to play hardball.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.